Brian Fallow: Not many rate-cut arrows left in Bollard's quiver

Economics editor Brian Fallow

Reserve Bank governor Alan Bollard is signalling today that there are not many rate cut arrows left in his quiver.

After a series of official cash rate cuts in which he have the markets all they were expecting and often more, today's cut of 50 basis points to 3 per cent was at the light-footed end of market expectations.

And the bank's projections for 90-day wholesale interest rates, which trough at 3 per cent in the second half of the year, imply the OCR will bottom at 2.5 per cent. Some forecasters have been calling for 2 per cent.

One reason why the bank is unlikely to follow some of its overseas counterparts and cut its policy rate to zero, he explained, is that he is conscious that lower rates hurt depositors. "I am already getting a lot of letters form older people about that," he said.

Another is that New Zealand as a small and highly indebted country needs higher rates to compete for funding in offshore markets.

Nevertheless the bank thinks the rate cuts it has already dispensed will cut the average mortgage rate people are paying by another 2 per cent over the next couple of years. The delay reflects the fact that fixed rate loans became very popular when rates were rising and it takes time for them to roll off onto the lower rates on offer now.

The bank's outlook for the inward-facing sectors of the economy is bleak.

We are barely half way through the 20 per cent peak-to-trough fall in house prices the bank expects.

And as unemployment mounts - to 6.8 per cent, the bank forecasts - job insecurity will add to the depressing effect on consumer sentiment from falling household wealth.

It expects consumer spending to remain very weak for the rest of the year and manage only feeble growth thereafter - to the extent that per capita consumption by 2012 will be lower than it is now.

In the export front New Zealand's trading partners are expected to contract by around 2 per cent this year.

All in all these are not forecasts likely to cheer anybody up.

Yesterday Prime Minister John Key was whistling a happy tune, citing tentative signs of improvement in the economic outlook.

All Dr Bollard was prepared to say today was that "we are seeing a slowdown in the rate of new bad news."